The crypto markets took a tumble on October 10. Bitcoin saw big losses. Other digital assets followed suit. For many, it felt like just another Tuesday, albeit a painful one. But for a specific corner of decentralized finance (DeFi), that market shudder set off a quiet alarm bell. It put nearly a billion dollars in a popular, high-yield strategy at serious risk.
- The sUSDe loop trade, a popular high-yield strategy in DeFi, is at significant risk due to recent market downturns. This strategy involves leveraging borrowed stablecoins to acquire more sUSDe, amplifying returns when yields are favorable.
- Market crashes, like the one on October 10, have caused funding rates in DeFi to drop, making borrowing costs higher than sUSDe staking rewards. This negative carry means the loop trade is now losing money, potentially forcing the unwinding of approximately $1 billion in positions.
- Key indicators to watch include the spread between Aave’s borrow APY and sUSDe yield, utilization rates in stablecoin lending pools, and the number of looped positions nearing liquidation, all of which signal increasing pressure on these leveraged strategies.
I’m talking about the sUSDe loop trade. Sentora Research, a firm that keeps a close eye on these things, recently flagged the danger. They pointed out that rates in DeFi markets have dropped sharply since the crash. This cut the juicy yields that made these leveraged strategies so appealing.
So, what exactly is sUSDe? It’s Ethena’s Staked USDe. Think of it as a synthetic dollar stablecoin, a digital currency designed to hold its value close to one U.S. dollar. It generates yield, a kind of interest, by staking its underlying USDe token. For a while, this yield was quite attractive.
The Clever Loop, Now Tangled
The sUSDe loop trade became a favorite among those looking for amplified returns. It’s a bit like financial origami. Traders would deposit their sUSDe as collateral on DeFi lending platforms. Aave and Pendle are common choices for this.
Once deposited, they could borrow other stablecoins. Tether (USDT) and USD Coin (USDC) are the usual suspects. Then, with the borrowed USDT, they’d buy even more sUSDe. This new sUSDe would go right back into the platform as collateral.
The cycle repeats. Deposit, borrow, buy more, deposit again. Each turn amplified the yield. This worked beautifully when the “carry” was positive. That means the sUSDe staking rewards were higher than the cost of borrowing the stablecoins. It was a neat trick, a way to make your digital dollars work harder.
When the Carry Turns Negative
But then came October 10. The market crash changed everything. The yield differential, that sweet spot where rewards outpaced borrowing costs, flipped. It went negative. This made the loop trade far less appealing, and for many, quite dangerous.
Sentora Research explained the shift clearly. They noted that “Following the flash crash on October 10, funding rates on DeFi markets have dropped significantly, cutting yields for basis‑trade strategies. On Aave v3 Core, USDT/USDC borrow rates sit ~2.0% / ~1.5% above the sUSDe yield, turning the carry negative for users borrowing stables to lever sUSDe.”
Imagine you’re running a small business. Your income suddenly drops, but your loan payments stay the same, or even go up. That’s negative carry. It means your looped positions, where you borrowed stablecoins to buy more sUSDe, are now losing money. Each day, the hole gets a little deeper.
This isn’t just a theoretical problem. Sentora estimates that if this negative spread continues, it could force the unwinding of roughly $1 billion in positions. These are positions already exposed to this negative carry on Aave v3 Core. That’s a lot of capital looking for an exit.
What happens when a billion dollars worth of positions need to unwind? It can get messy. Traders might be forced to sell their collateral. This is called deleveraging. It means they reduce their borrowed funds. This action can drain liquidity from the very platforms providing the leverage. It creates a ripple effect, a cascading market impact that nobody wants to see.
Watching the Horizon: What Comes Next
So, what should a curious observer, or a nervous trader, keep an eye on? Sentora offers some clear indicators. The first is the spread between Aave’s borrow annual percentage yield (APY) and the sUSDe yield. If this number stays below zero, it’s a red flag. It means the negative carry persists, and the pressure builds.
Another key metric is the utilization rates in USDT and USDC lending pools. Think of utilization rate as how much of the available money in a pool is currently borrowed. When these rates spike, it means more people are borrowing. This can drive up borrowing costs. Higher borrowing costs, combined with a negative spread, only add to the stress.
Sentora also pointed out a rising number of looped positions nearing liquidation. These are positions within 5% of forced closure. It’s like a car running on fumes, just a few miles from breaking down. The closer these positions get to that 5% mark, the higher the risk of a sudden, forced sale.
The October 10 crash was a reminder of crypto’s volatility. It also highlighted the delicate balance in leveraged DeFi strategies. The sUSDe loop trade, once a clever way to boost returns, now serves as a cautionary tale. It shows how quickly market conditions can shift, turning profit into peril. Keeping a close watch on these indicators will tell us if this particular DeFi tightrope walker can find solid ground, or if it’s headed for a fall.
